Is Brazil’s Manufacturing Slowdown a Result of the World Cup or High Labor Costs?

According to Reuters, “Output at factories and mines rose a seasonally adjusted 0.7 percent in July from June, statistics agency IBGE said on Tuesday. That surpassed expectations of a 0.5 percent increase forecast, according to a Reuters survey of 20 analysts. Industrial production had fallen 1.4 percent in June from May, partly due to the World Cup soccer tournament. Factories idled production during some game days in the month.”The numbers follow the country’s recent recession, most of which was due to a reduction in manufacturing.

Although manufacturing activity increased slightly in August, it was likely the pickup from the World Cup production stoppage.

Analysts expect that the current road block to significant expansion is due partly to labor costs and global pricing competition. Brazil fails to remain competitive when it comes to production overhead.

Forbes notes, “Brazil may be a lot poorer than the U.S., with per capita GDP under $15,000 annually, but it is not a cheap country to conduct business. Tax burdens, infrastructure concerns, and a volatile currency have held back a number of Brazilian businesses.”

The issue is inside the factories. Production lines require more people to power them. Industrial plants aren’t equipped to automate the process with heavy machinery like richer countries. Sluggish productivity in turn impacts manufacturing costs.

Production rate charges have increased 26 percent from 2004 to 2014 compared to the same U.S. costs. Meanwhile, labor productivity has increased only one percent in the same period.

Lack of skilled labor, government setbacks, and high natural gas prices (60 percent higher in 2013) also impact the country’s ability to produce competitively.

In the coming months, if factory output slows any further, it could speed up unemployment rates, which might further hold back the already stunted economy. However, a governmental emphasis on industrial employment could drive manufacturing costs even higher.